Opinion: Washington ignores lesson of S&P downgrade

August 9, 2011

Special to CNN


  • President Barack Obama said he hopes S&P downgrade will prompt compromise
  • Gayle Tzemach Lemmon: All signs are that two parties are locked into partisan warfare
  • She says Democrats and Republicans immediately started blaming each other
  • Wall Street may discover it no longer likes Washington gridlock, Lemmon says

Editor’s note: Gayle Tzemach Lemmon analyzed public policy for the global investment firm Pimco after working as a journalist for ABC News’ political unit and “This Week With George Stephanopoulos.” She is a fellow at the Council on Foreign Relations and author of “The Dressmaker of Khair Khana.”

(CNN) — In the wake of America’s S&P downgrade, an event that transformed the previously unthinkable into reality, President Barack Obama urged “Democrats and Republicans to work together to help grow this economy” and “put politics aside to get some things done.”

In a Monday speech intended to soothe turbulent financial markets, the president said that despite the avalanche of negative financial news, including the downgrade of government-sponsored and now government-dependent mortgage giants Fannie Mae and Freddie Mac, the country’s problems are “eminently solvable.”

“My hope is that Friday’s news will give us a renewed sense of urgency,” he told reporters gathered in the White House’s State Dining Room while the grisly stock market sell-off continued unabated.

But those hoping that the S&P scolding will result in a season of understanding likely will be sorely disappointed. After weeks of bruising debt-deal negotiations, cooperation — let alone reconciliation — faces long odds.

The president may be calling for unity, but so far the only thing Democrats and Republicans can agree on is that S&P’s decision to question America’s creditworthiness proves the rightness of their own positions. And with both parties finding vindication in S&P’s words, the country is apt to see each return to its side of the ring to continue the fight re-energized.

The politics of corners rules the day. And we are headed for more of it, not less.

In Republicans’ view, the downgrade is the result of Democratic fiscal recklessness — and they rushed to say so. House Speaker John Boehner said he hoped “this wake-up call will convince Washington Democrats that they can no longer afford to tinker around the edges of our long-term debt problem.”

Presidential hopeful Rep. Michele Bachmann called the downgrade “a historically significant and serious event for the United States” and said Obama “has destroyed the credit rating of the United States through his failed economic policies and his inability to control government spending by raising the debt ceiling.”

Meanwhile, another Republican presidential contender, Mitt Romney, announced that “America’s creditworthiness just became the latest casualty in President Obama’s failed record of leadership on the economy” and called the downgrade “a deeply troubling indicator of our country’s decline under President Obama.”

Democrats see the S&P downgrade as the creation of a GOP willing to take down the economy to bolster its ideology, regardless of consequences. And in the ratings agency’s words they see an affirmation of their call for tax increases, not just budget cuts.

“The action by S&P reaffirms the need for a balanced approach to deficit reduction that combines spending cuts with revenue-raising measures like closing taxpayer-funded giveaways to billionaires, oil companies and corporate jet owners,” said Senate Majority Leader Harry Reid, D-Nevada.

Rep. Steve Israel spoke in plainer terms, calling the downgrade “the direct result of roadblock Republicans.” And House Assistant Democratic Leader Rep. Jim Clyburn said the “American people need the Republicans to stop their reckless and irresponsible political games that led to this unfortunate downgrade.” On the Sunday morning shows, Democrats lambasted the “tea party downgrade.”

Republicans and Democrats alike have called Friday evening’s downgrade a “wake-up call.” But it is clear they are worlds apart on what, exactly, we should all wake up to — and more dug in than ever on what led to this moment.

S&P had it right when it said “the differences between political parties have proven to be extraordinarily difficult to bridge.” But what it did not predict was that the translation of its own verdict would now exacerbate the dividing line that separates Democratic and Republican worldviews.

That line is likely to grow brighter, not fainter, as the congressional debt panel readies a next round of $1.5 billion in deficit cuts later this year and the fight for a deal heats up once more, this time with a presidential election even closer at hand. The “supercommittee” created by the agreement that raised the debt ceiling is designed to circumvent partisan passions, but so far it looks to be inflaming them even further, with each side saying it will give no quarter and Republicans ruling out tax increases before the committee’s members have been named.

“Over the next several months, there will be tremendous pressure on Congress to prove that S&P’s analysis of the inability of the political parties to bridge our differences is wrong. In short, there will be pressure to compromise on tax increases,” Republican House Majority Leader Eric Cantor said in a memo to fellow House Republicans. “We will be told that there is no other way forward. I respectfully disagree.”

Washington and Wall Street have long been locked in a porcupine tango, dependent upon one another but bristling with misunderstanding and mutual disdain. For years investors have warmly embraced gridlock because it prevents politicians from doing things markets would rather they not attempt. But this time may indeed be different.

Markets know the difference between AAA and AA+ when it comes to the world’s financial safe haven, and they would like to see the United States remain truly “risk-free.” Capital has few other, safer places to park, a fact that accounts for soaring demand for Treasuries last week despite the downgrade threat. Treasury yields continue to be lower than any other country, meaning the United States can borrow for less, but as JP Morgan notes, a 50 basis point — or 0.5 percent — rise would “eventually cost U.S. taxpayers an additional $75 billion each year.”

Unfortunately, America’s prized economic “A”s now rest on the willingness of the two parties to leave their corners and find a middle ground that allows investors to believe in America’s continued strength. And in this case past performance may well be an indicator of future results.

The opinions expressed in this commentary are solely those of Gayle Tzemach Lemmon.